Q4 2023 Medallion Financial Corp Earnings Call

Participants

Andrew Murstein; President & COO; Medallion Financial Corp

Anthony Cutrone; Executive VP & CFO; Medallion Financial Corp

Ken Cooper; Analyst; Life Time Group Holdings

Christopher Nolan; Analyst; Ladenburg Thalmann

Mike Grondahl; Analyst; Northland Securities

Matt Howlett; Analyst; B Riley Securities

Presentation

Operator

Good morning, and welcome to the Medallion Financial Corporation Fourth Quarter and Full Year 2023 earnings conference call. (Operator Instructions) Please note this event is being recorded. I would now like to turn the conference over to Ken Cooper of Investor Relations. Please go ahead.

Ken Cooper

Thank you and good morning, everyone. Welcome to Medallion Financial Corp's fourth quarter and full year earnings call. Joining me today are Andrew Murstein, President and Chief Operating Officer; Anthony Cutrone, Executive Vice President and Chief Financial Officer. Certain statements made during the call today constitute forward-looking statements made pursuant to and within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 as amended.
Such forward-looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from such statements. Those risks and uncertainties are described in our earnings press release issued yesterday and in our filings with the SEC. Forward-looking statements made today are as of the date of this call and we do not undertake any obligation to update these forward-looking statements.
In addition to our earnings press release, you can find our fourth quarter supplement presentation on our website by visiting medallion.com and clicking Investor Relations presentation is near the top of the page.
With that, I'll turn it over to Andrew Murstein, President.

Andrew Murstein

Thank you, Ken, and good morning, everyone. With a tremendous team effort throughout our entire organization. Medallion Financial had an exceptional year with total earnings and earnings per share, the highest in our history. We grew loans within our largest and most established business, the recreational lending segment by 13% to $1.3 billion. We did this while increasing the average interest rate on the portfolio, which was 51 basis points higher at the end of the year compared to last year and helped to cover some of the cost of funds increases we saw this year.
We grew this segment while maintaining tighter credit standards and a sharp focus on the type of assets we lend against, which are generally smaller dollar assets such as towable RVs and small boats. These assets have not had the volatility that catches the headlines, the large cruiser RVs, a larger scale boats and yachts. The average loan size in our portfolio stayed roughly at just over $19,000, our home improvement segment continued to be the fastest growing part of our business.
As expected, the growth rate slowed in 2023 as we were another year removed from the unprecedented spike in pandemic driven home remodel activity. However, with growth of 21% for this segment, there continues to be a steady flow of projects, especially for the smaller roofing windows or swimming pool projects that we are known for. Like our recreational segment. We maintain tighter credit standards and a consistent average loan size in our portfolio of approximately $20,000.
Nearly this entire segment is made up of prime customers with an average FICO score of over [760]. Our commercial lending segment also had a very strong year. We grew the loan portfolio of 24% to $115 million, with our average interest rate of 64 basis points to 12.87% with a range of typical loan size generally around $3 million to $6 million. Our goal is to continue to grow this segment prudently over time. This segment generated after-tax earnings of approximately $6.8 million during the year.
Finally, our taxi medallion segment collected $45 million of cash during the year, $16.2 million of this coming in the fourth quarter, the majority of the cash generated from taxi medallion collections was at Medallion Bank and was reinvested into the consumer lending businesses. We continued to mention that these settlements are unpredictable, and we expect our collection activity to decrease in 2024.
One item to note, as a reminder, we adopted CECL at the beginning of the year, which now requires a larger allowance for credit loss to be booked upfront and the loans are originated. This increased our provision this year. In addition, our current loss rates are more closely aligned with our historical trends and are consistent with what we have been indicating they would be as we come out of the low credit loss environment experienced during and after the pandemic, even with the adoption of CECL and normalization of our loss rates, much drilling execution across our entire company, that that's $0.6 of diluted earnings per share in the quarter and $2.37 for the year, which was an all-time high for us.
Our strategy continues to be grow net interest income. We were doing this with smart loan growth and by offsetting elevated cost of funds with our own rate increases where possible. We expect that as we proceed through 2024, we will maintain our focus on high credit standards and using pricing to our advantage. We anticipate loan growth to continue to moderate from the levels we saw in 2022 and for us to maintain a conservative approach on credit and growth.
Finally, during the fourth quarter, our Board authorized a 25% increase in our quarterly dividend from $0.08 to $0.1 per share, which began with our last declared dividend, and we feel great about what we have accomplished over the past three years and how we are positioned for the future success.
With that, I will now turn the call over to Anthony, who will provide some additional insight into our quarter.

Anthony Cutrone

Thank you, Andrew. Good morning, everyone. for the quarter, net interest income grew 12% to $49 million from the prior year, driven by increased interest rates on new loan originations and the growth in our loan portfolio during the past 12 months.
For the year, net interest income increased 17% to $188.1 million. Our ability to increase our rates on new originations and our overall loan growth have enabled us to counteract some of the rising cost of funds we experienced during the year. Our net interest margin on gross loans was 8.20% for the quarter and 8.38% for the year compared to 8.59% and 8.73% in the prior year quarter and year. We've spoken about compression in our name for some time now, and it continues to trend. As expected, rising interest rates on our brokered CDs have increased our borrowing costs over the prior year.
However, we've taken the opportunity to pass along a portion of those rising costs in our pricing on new originations specific to originations during the year, we wrote home improvement loans at an average rate of 11.02%, up from approximately 8.75% in 2022 and road recreation loans at an average rate of 16.16%, up from approximately [14.25%] in 2022. At the end of the year, we were writing home improvement loans at an average rate of 11.65% and recreation loans at an average rate of 16.14%. As of the end of the year, our average coupon on recreation loans were up 51 basis points to 14.79% from a year ago. And our home improvement loans were up 86 basis points to 9.51%.
In addition to passing the loan interest rate increases. We have continued with our tightened credit criteria. Nonprime loans were 38% of the recreation portfolio and continue to be only 1% of the Home Improvement portfolio at the end of the year. But this in just some comparative context regarding how we've tightened credit over the past few years, at the end of 2019, nonprime loans was 61% of the recreation portfolio.
Our provision for credit loss was $10.8 million for the quarter compared to $9.0 million in the prior year quarter. For the year, the provision for credit loss was $37.8 million and $30.1 million in 2022. Provision included a net benefit of $12.1 million in the current quarter and the net benefit of $26.3 million for the full year related to taxi medallion loan recoveries compared to benefits of $1.6 million and $6.2 million in the prior year periods.
Excluding taxi medallion related recoveries, the increased provision as a result of the continued migration of loss experience to levels more comparable with pre-pandemic historical norms, the growth entity we incur by growing our portfolio, as well as the variability in our provisioning as a result of the adoption of CECL this year. On a full year basis, we incurred approximately $8.5 million of additional provisions connected to the growth in our consumer loan portfolio and approximately $3.4 million of additional provisions associated with the higher allowance coverage rates tied to CECL, a majority of which were incurred in the fourth quarter at the end of the year, our allowance for credit losses as a percentage of loans were 4.31% for recreation loans and 2.76% for home improvement loans up from 3.55% and 1.81% a year ago and compared to 4.39% and 2.05% at the beginning of the year post our adoption of CECL.
operating expenses were $19.1 million during the quarter, which were in line sequentially from the third quarter. For the year, operating expenses were $75.6 million compared to $72.1 million a year ago. The growth is mostly related to scaling our lending operations, offset by lower legal and professional costs for the quarter, net income attributable to our shareholders was $14.3 million, or $0.6 per diluted share for the year. Net income attributable to our shareholders was $55.1 million or $2.37 per diluted share. That covers our fourth quarter and full year financial results. Andrew and I are now happy to take your questions.

Question and Answer Session

Operator

We will now begin the question and answer session(Operator Instructions)
Christopher Nolan, Ladenburg Thalmann.

Christopher Nolan

On F&E, what do you think the Medallion recoveries contributed to EPS in the quarter.

Andrew Murstein

So again, as we put in the press release, the recoveries were, I think about $0.33 a share. You know, based upon on what we brought in a large portion of that was on one or one specific large relationship that came in in October. We had spoken about it last quarter. Well, we'll go and have a Q3 and a few other not as large but significant significant items.

Christopher Nolan

Second question is the reserve allowance. Where do you think it goes as percentage of loans going forward should we see continue to step up through 2024?

Anthony Cutrone

It did come in. And when we look year-over-year, we adopted CECL this year. And with that adoption that we were up 21% on the rec allowance and over 50% on home improvement. I would say that our CECL model is a function of historical losses. We trying to project that out as to expected losses over the life of the entire portfolio. And when we take into account, you know, various economic circumstances. And so I think what we saw is that provision stepped up and our allowance coverage stepped up in Q4.
It was actually something we were expecting to see throughout the entire year. That didn't happen for the first nine months and we saw a step up in Q4. Some of it has to do with the seasonality of our portfolio. Charge-offs are typically higher in December, January and then settle back down towards the end of Q1, you know, as the weather starts getting nicer, I think you know, it's going to be a function of the economy. We get a nice soft landing like some are suggesting. And I think I think we should be okay, if things are a little bit bumpier, we might see a little a little bit higher provision.

Christopher Nolan

Okay. And then I guess a final question is on given the regional banks are sort of everyone's waiting for the shoe to drop on commercial real estate. Do you anticipate that FTIC. could require a higher capital ratio for the bank.

Andrew Murstein

We've got a pretty high capital ratio. So I don't think it would be specific. I mean, we're we've got a capital maintenance agreement where our Tier one leverage ratio is 15%. We're north of 16%. Now I would imagine if there was something to come out, that wouldn't be specific to our institution, it would be across the board. I mean, I think that we'd probably be kind of where we are now.

Christopher Nolan

Great and one day we hope to get that uplift?

Anthony Cutrone

Yes, I confirm that. I mean, ours is extremely high. As you know, well-capitalized, I think is about 6% and we're at 15% or so. So today, as Anthony said, were both above 16%. So the commercial real estate issues of others, I think could have a positive effect in that several of them. We've be leaving some of our business lines and we've stuck to our knitting. We really focused on what we do best and have not strayed in times like this banks that have issues with the commercial portfolios and real estate tend to get out of home improvement, RV and marine lending. And that's when historically we've picked up market share.

Christopher Nolan

Great. And final question, when should we expect the K that we released?

Andrew Murstein

and probably another week and a half.

Christopher Nolan

That's it for me.

Andrew Murstein

Thank you very much, Chris.

Operator

Mike Grondahl, Northland Securities.

Mike Grondahl

Thanks, guys. Could you talk a little bit about what kind of your origination outlook and how that might translate into sort of growth in the various loan books?

Andrew Murstein

for sure. I think and I think it's a good question, Mike, and it's something that we think about on a regular basis coming out of the pandemic 2021, 2022, we saw record growth and even 2023 was much larger than I think, a traditional year. And again, what we're targeting, what we're targeting in our long term, as you know, annual growth in our plus or minus 10%.
And over the long term, I think 2024 will probably be in the high single digits and a portion of that is one in which there's still a lot of uncertainty with the economy and how does that affect demand? And we'll see how many others that we've taken a pretty strong stance on credit. We've stepped up in our criteria and we've never been ones to chase volume, even though we've grown so much and we're not going to chase originations. But I think you know, it was just looking at 2024, you know, high single digits, somewhere in that, you know, 6% to 9% range. That's probably where we end up across the board.

Mike Grondahl

Okay, thanks. And was there a one-time gain related to equity investments or any other noise to call out with the $0.6 EPS other other than the taxicab.

Anthony Cutrone

So I wouldn't say we did have some equity gains and we don't we don't view them as one-time on essentially all of our equity portfolio. It's about $11 million at the end of the year. It's tied to our mezzanine lending business that's operated out of Medallion Capital. So, when we make an investment there, you know, up to 10% of the investment goes into some sort of equity security there. So, we've got it, you know, $100 plus million book of loans that we've got in our $10 or $11 million of equity securities. We did have a net gains of about $3 million in the quarter. But again, these are these these are one-time items. We've had those in the past gotten the element that you have, does that book inside of the commercial book direct.

Andrew Murstein

Yes, and brands at this point, Mike, as you know, we bought that company in 1998. So, we've got 26 years of history there of great success. So, hopefully it continues, but it's hard to estimate when we're going to have those pops from time to time, but it does have a nice, steady, steady income stream is lending money at 13% plus rates. And then you have these kickers that kick in from time to time.

Anthony Cutrone

And those like I said, those kickers, you know, book value was $11 million at the end of the year, and it's across some 34 portfolio companies that we've invested in cool.

Mike Grondahl

I didn't know if it was tied to the commercial book or sometimes you guys in the past have made some one-off investments and whatnot. So I just wanted some clarity there and any comment from kind of for '24 on that. The net margin was like $850. I know sometimes sometimes you guys talk about gross margin but is that margin pressure largely done? Or do we see kind of a tail end of it in '24?

Anthony Cutrone

I wouldn't say it's done. We think that there's still compression to come. We saw our cost of funds increase in '23, but we also saw our top line yield go up. And that's part of the slow to turn shift when we talk about new originations at a higher level with a $2 billion book. It takes a while for that to trickle through to the income statement and show up in the yield.
So we're starting to see that we think we still can see that the yields rise in '24 cost of funds will also come up. There's a little bit more compression. But I think we are still comfortable thinking that it bottoms out around 8% plus or minus, you know, a few basis points sometime towards the second half of the year.

Mike Grondahl

Got it. And then up on the provision, Anthony, if I take your actual provision expense in the quarter, the $10.8 million. And if I add in back to it, the $12.1 million benefit from the taxi cab collection. Am I thinking about it right saying, hey, that provision was really $22.9 million and you had said, hey, it's stepped up in 4Q.Is that about the right level to think about on a quarterly basis now if I think

Anthony Cutrone

Q4 is always, you know, are our worst performing quarter from a delinquency and charge-offs. As you think about, you know, in the coastal areas where we do a lot of our business, you know, selling boats in our outdoor activity, RVs, people are outside more when the weather is nice. So you know, the end of November, December, January, things are worse and people aren't as concerned about making the payments on their on their boat, right for one some once the warm weather starts coming around, those delinquencies typically drop.
So this is the seasonality we've seen over a 20-year period we didn't experience it for the year or two's following COVID. And we started to see it a little bit last year, and we think it's back now on time will tell if the delinquencies and the charge-offs that we experienced in Q4 or just seasonality or if there's something bigger in the economy and that's something we're attuned to and that goes back to the credit standards we have and really trying to change the composition of our book.

Mike Grondahl

Got it. Got it. Okay. And then, hey, have you collected anything in January or February so far tied to the taxi cab Medallion?

Anthony Cutrone

If everyone wants to be a home run two years in a row, you know, we have collections coming in every day. Unfortunately, we don't expect them to be anywhere near the level that they were in 2023. We always knew and Andrew spoken about this for a long time is that there was going to be a significant amount of recoveries. I think we expected that over a long period of time for a longer period of time. What we found is a lot of that showed up in 2023.
So at the end of '23, we still have, you know, I have a few larger relationships that have the potential for provide for some meaningful recoveries. A lot of them are actually we've got structured settlements with them and they're actually meeting those settlements. So we don't expect any windfalls as of now for 2024.

Andrew Murstein

And to add to that, my exec, there's a little bit of a wait and see in the Medallion industry in New York City now congestion pricing that's supposed to kick in in a couple of months. The hope of the Medallion industry is that that's going to be very positive for them. The concept behind that is to keep consumer cars out of Midtown.
And as that works, then you would think for people who take that only more Medallion rise, Yellow Cab rise, but also Uber and Lift rise. But that whole sector should do better if this is done implemented the right way. So hopefully there could be collections in the second half of the year if more of taxi usage increases, which is what we think will happen.

Mike Grondahl

Fair, fair. And Anthony, we got 16 inches of ice on our lakes in northern Minnesota. So I understand that seasonality a little bit. It slipped but thanks, guys.

Anthony Cutrone

That's my take.

Operator

Matt Howlett, B. Riley.

Matt Howlett

Hey, thanks, everybody. Good morning and another strong quarter. I guess the first question is just on your your capital strength in Europe, probably one of the highest ROE generating banks out there. You get your incredibly efficient at 40%. You look at your capital ratios they look like they're just going to hear Bill does is slow down portfolio growth. I think you said what mid to high single digits. I know you're being cautious and I want to ask about the CECL reserve in the second, but you know, as you go as the cap because it continues to build.
Yes, Anthony and Andrew, do you feel like you look at you've just raised the dividend, you look at more buybacks. Obviously, you've talked about looking at other platforms, you're in an envious position as the capital because, it continues to grow and it looks like it's just going to continue to increase through 24. I'm just wondering here, would you look at more speeding of loan growth just curious what the thoughts are initially?

Anthony Cutrone

Yes. I think with the loan growth that we're looking at for 2024, like we just spoke about, we do need a fair amount of capital with the 15% maintenance requirement, actually you got to retain. So you take that coupled with the dividend that we've got in place to our shareholders. We think we think we're deploying that capital and that the generation of that capital appropriately.
And you know, obviously, we're always opportunistic as the opportunities at a raise of new preferred debt or preferred equity at a bank like we've done in the past, we'd look to that. But I think I think for now, you know, there's nothing on the horizon in terms of you know what could happen buybacks, we still have $20 million available. We're going to remain off to opportunistic with that. We could if something were to happen and it's accretive to shareholders that could be in the market. We're going to do that, growing our business the way we have and the way we continue to do, we think that's the best thing long term for our shareholders.

Andrew Murstein

Yes, as you know, Matt, these are I think it is a good problem to have, right. If you look at our balance sheet, we've got a lot of cash on hand now. So there's a lot of options that we have available to us.

Anthony Cutrone

Yes, we just made with that cash on hand, you know that the consolidated balance sheet. A lot of that is liquidity at Medallion Bank community. They keep a fair amount of cash on hand and that you know that that could move based upon originations. You know pretty rapidly, right.

Matt Howlett

Look, we have a great track record of returning capital, and you did that with the buybacks. You raised the dividend and you know, clearly want to keep the open access that cushion to 15%. But that will be interesting to see you guys always opportunistic with capital, and certainly the buybacks went a long way. So, we'll look forward to that.
And then getting back to the CCLANT. And Andrew, and these is there a way to quantify? I mean, Lucky was it does weigh down your results throughout 2023, particularly in the fourth quarter and yet I get the front-loading of it and everyone has to do of it seems like it's more onerous to you guys and everybody else. I know you talk about whether you want to be cautious in the supplement.
You have soft or hard landing, but is there any way to sort of send it tell us quantify here what really the CECL reserve could be '24. It seems like with the slower loan growth versus '23 and then the movement up in credit, you clearly don't have as much subprime as you did. You know, several years ago, we could we see sort of a normalization in that line. So, it doesn't throw off the earnings and the are we already generating 70% already, but I'm assuming it's going to be a lot higher. We get a normalization in that provision.

Andrew Murstein

Yes. So it's a fairly complex analytical model that we've designed. And essentially what it does is it tries to predict what's the probable default weighted model that tries to predict what our future losses are going to be. So anytime there's a change in outside economic variables, inflation changes, you know, primary changes, things of the unemployment changes, things of that nature. It's going to have an effect. Additionally, you know, it looks at historical losses.
So if we see an uptick like we did in Q4, it's going to affect the provisioning as well. We expect that as we get through the first half of the year, and, you know, charge-offs, you know, assuming that seasonality is what we expect it to be. Charge-offs come down some after you know, maybe January, February, we should see, you know, it may be a reduction in some of that, but it's some it's so closely tied to economic variables that it's it really is hard to predict it. It's I think it's one of the things we were concerned about. And frankly, it's happening. This unpredictability or this variability that we saw in Q4 is what we were expecting the full year. It's just that the first nine months it didn't show right now.

Matt Howlett

Look, it definitely had it certainly looked like it was over overly punitive here in the fourth quarter. So we look forward to more of a normalization of that may be interesting. Speaker run, yes, sorry. And so I used to do it. How do you sort of look this year versus versus the new CECL adoption, but we'll take a look at that.
I guess in the last question, just on, you've done a great job pricing. I think you said your rates now are over [16], John Ragan and with close to [12] on the home improvement demand, it may Centro Terrific. You bumping into any, but I mean, can you just increased I mean, where are you pricing? It seems like it's going to level off or you're running in any anybody competition, as you said into the management tend to back out at these parts of the cycle. Maybe just give us a little sense on competition and who you're bumping into.

Anthony Cutrone

Yes. I think obviously at the edge as we raise pricing, you know that that's going to have an effect on our originations. So there's definitely there's a lot there's a fair way we want to operate, and we're now looking to price ourselves out of the market, but we definitely wanted to point out, but we're not as concerned would be competitive as we are with generating the type of returns that we would typically see on. So I wouldn't expect to see any meaningful decrease from these levels.
That said, you know, we're excited if the Fed comes in with some rate cuts down the line. We're going to factor that into our pricing. Again, we do want to price ourselves out of the market, but we're also not going to drop rates just to chase volume.

Matt Howlett

Is that going to be certainly big could be certainly a big boon for you guys, really appreciate it. Thanks a lot.

Operator

Mike Grondahl, Northland Securities.

Mike Grondahl

Yes, hey, Anthony, our operating expenses were like $75.5 million in 2023. It's really only up a couple of million EUR on 2022. Is that $75.5 million the right base level for '24? Do you see like a couple of million growth throughout the year. How should we think about operating expenses in '24?

Anthony Cutrone

It's about their inflation. You know, isn't just a factor in terms of what it does to our borrowers. We've got over 100 employees. And so we give them standard of living increases so that they can keep up. Sina salaries will go up some, you know, because of our because of our earnings, you know, compensation was higher this year than it was maybe in past years.
And so that might come down a little bit. But I think I don't know that there's any extraordinary items in operating expenses that would, you know, cause it to fluctuate. When we look at 2023, obviously, you know, professional fees could vary down the line. But but I think in terms of, you know, a normalized run rate, I think this was looks about where we should be.
That said, you know, if you look two years ago were significantly higher. But over the course of three years, we've we've more than doubled our loan book. So I know as we scale, there's going to be additional costs that we incur. And that's that's just part of the business for And

Mike Grondahl

Fair enough. Okay. Thank you.

Operator

This concludes our question and answer session. I would like to turn the conference back over to Andrew Murstein for any closing remarks.

Andrew Murstein

Thank you again for joining us this morning. We had a great year and we're proud of everything that we accomplished not only in 2023, but over the last several years for 2024 and beyond, we're positioned well with a strong balance sheet, prudent reserve levels. And most importantly, an incredible team.
We believe this will continue to deliver significant shareholder value. As always, if you have any questions, please feel free to call our Investor Relations team. The contact info is on the last page of our earnings supplement as well as the IR section of our website. Thank you again, everyone, and have a great rest of your day.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.